Analysis, Perspective, Trading Strategy
Food for thought: Hurricanes in Florida and Wall Street Cause Waves in the Ag Sector
By Joe Duarte on October 14, 2018
As hurricane Michael
was pummeling the panhandle of Florida, Wall Street was getting blitzed
by Hurricane Algo. But in Chicago, the agricultural commodities were
getting a quiet and credible bid. Altogether, stocks are ripe for a bounce
and the agricultural commodities are getting a weather scare and uncertainty
A few weeks ago, I noted that what seemed to be an emerging divergence
in the New York Stock Exchange Advance Decline line (NYAD) might be
the SELL signal to be heeded. Well, needless to say I was right and
if anyone followed my suggestions: trade small, hedge, use options,
and keep more cash around than usual there is a decent chance that
the damage to their portfolios could have been worse.
To be honest I’m not happy about being right, especially when it’s
hard to know whether next week will bring more unwinding of weird derivatives
and margin call related liquidation by those who didn’t see it coming.
Moreover, as bruised and battered survivors of the Algo storm all we
can do now is to pick through the debris and see if there is anything
worth salvaging. Still, even if stocks bounce, it seems as if winter
is going to be surprisingly cold and the agricultural commodities seem
to agree which is why stocks could face a bit of competition.
If there is something positive to say about last week’s trading it
that the death of the recent rally was quick. This could well be a
sign that the worst is over and that some sort of bounce is in the
cards. Moreover, are there any hedge funds left to mount some sort
of offensive? Will companies use the dip to buy back more of their
own battered stocks in order to make their earnings look better for
longer? And will the algos switch from front running sell orders to
front running buy orders?
So Indescribably Oversold
I don’t recall ever seeing any swifter and more damaging selling
than what happened last week. Yet, the net result is a market that
is so oversold that the only reasonable direction of prices in the
near term should be up*. Yes, there is an asterisk attached to the
prior sentence because, as I’ve said multiple times, this time is different.
For one, the New York Stock Exchange Advance Decline line, which
continues to be the most accurate indicator of the market’s direction
since the presidential election of 2016, has not been this oversold
since the election, as documented by the RSI reading of 21 it registered
at the close of trading on 10//12/18.
In fact, the Algos seem to be following a familiar
pattern of taking NYAD to some key support level and doing the expected
thing. Note NYAD is now testing the 200 day moving average while RSI
and ROC are trying to turn around and mount an advance of some sort.
Ditto for the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes
which, predictably broke just below their 200 day moving averages long
enough to trigger the last bit of panic selling from capitulators who
had been hoping for a bounce on Thursday but didn’t get one.
This of course brings me to the FAANG ETN (FNGU); which is off nearly
50% from its June 2018 top and which also followed the algo script
at the 200 day moving average and is respectively displaying a set
of equally legendary oversold technical credentials.
So where was the money going during the algo hurricane? Aside from
going under mattresses, it seems as if a stealth depository of funds
might have been the agricultural commodities. Consider the action in
the Invesco DB Agriculture ETF (DBA) which seems to have put in a credible
bottom over the last few weeks and which is under some aggressive accumulation
as documented by the Accumulation Distribution (ADI) and On Balance
Volume (OBV) indicators.
Food for Thought
As Wall Street worries about the future, commodity traders seem to be
betting on something, perhaps a colder than expected winter, and are
starting to pile into agricultural commodities. The agricultural stocks
certainly held up better than the tech stocks last week. And this is
not something new. I’ve been bullish on Hormel (NYSE: HRL) and Archer
Daniels Midland (NYSE: ADM) for some time and continue to hold those
stocks, whose reasonable resilience during last week’s stock market carnage,
coupled with the stealth assent in agricultural commodities,
suggests that maybe something very different is on the way and the
smart money is starting to build a long term home there as they exit
the FAANG stocks.
I own shares in HRL and ADM as of this writing.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
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